Abstract
This paper extends existing analyses of self-insurance and self-protection—distinctions first made by Ehrlich and Becker (J Polit Econ 80:623–648, 1972)—that countries may implement at a national level in pursuit of their security. We show that, when no market insurance is available, self-insurance alone raises important new issues as to the definition of “fair pricing” and as to the relations between pricing, optimization, risk aversion, and inferiority that are significantly different from standard, conventional market analysis. We also discover a hitherto unrecognized tendency for misallocation between self-protection and self-insurance when both are available and considered together. Because of external effects running from self-protection to self-insurance, governments ruled by myopic bureaucracies and trying to find the right balance face incentives that encourage extreme, self-inflicted moral hazard, to the detriment of self-protection.
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An earlier version of this paper was presented to a Conference on “The Causes and Consequences of Conflict,” Wissenschaftszentrum Berlin (WZB), Germany, March 28–29, 2008, with proceedings in a special issue of Economics of Governance. The authors thank Robin Boadway, Magnus Hoffman, Kai Konrad, other conference participants, and this journal’s referee for insightful comments on earlier versions.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Ihori, T., McGuire, M.C. National self-insurance and self-protection against adversity: bureaucratic management of security and moral hazard. Econ Gov 11, 103–122 (2010). https://doi.org/10.1007/s10101-010-0073-z
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DOI: https://doi.org/10.1007/s10101-010-0073-z